A Big Price Tag for Waiting – Using the Estate/Gift/GST Tax Exemption in 2012

Unless Congress does something to change current tax law, 2012 may be the last year of historically high estate, gift and GST tax exemptions – $5 million for an individual and $10 Million for a married couple. On January 1, 2013, these exemptions drop to $1 million/$2 million, summarized as follows:

For two years only – 2011 and 2012 – Congress raised the Gift, Estate and GST Exemption to an historic high of $5 million per person, $10 million for a married couple.

This is the amount that can be transferred free of estate, gift or GST tax.

Under current law, these exemptions are scheduled to be significantly reduced to $1 million ($2 million for a married couple) beginning January 1, 2013. Also beginning in 2013, the highest estate tax rate returns to 55%.

Therefore, 2012 presents a unique opportunity to shift up to $10 million from a taxable estate.

For example, if a married couple has $10 Million available to transfer, but does nothing in 2012, the combined estate tax thereafter could be $4,400,000 ($10,000,000-$2,000,000 post-2012 combined exemption=$8,000,000 X 55%=$4,400,000 Tax). However, if the $10 Million is effectively transferred in 2012, there is not a tax on these assets,saving $4,400,000.

Alternatively, if a single individual has $5 Million available for transfer, but does nothing in 2012, the estate tax thereafter could be $2,200,000. However, if the $5 Million is effectively transferred in 2012, there is not tax on these assets, saving $2,200,000.

Despite the substantial tax benefits, many clients are not willing to give up the benefit or control of this significant value. Fortunately, several advanced irrevocable trust strategies are available to both transfer assets and retain varying levels of control and benefit of assets while allowing the substantial tax benefits of transferring assets discussed above.

Consider the following:

Transfers to Irrevocable Trusts for Children and Descendants – Assets retained in trust for beneficiaries with client’s spouse or another as trustee managing investments and distributions; assets remain protected from creditors and never again subject to transfer taxes.

Transfers to Irrevocable Trusts for Client’s Spouse, Children and Descendants – Same as above, except that the client’s spouse is also a beneficiary as well as the trustee. Allows spouse to control assets and have access if necessary. With careful drafting, it may even be possible for the client’s spouse to establish a similar, but not identical, trust for the client, children and other beneficiaries.

Transfers to Domestic Asset Protection Trusts – Client can establish a trust for their own benefit, as well as for the benefit of their spouse and descendants. The trust can provide protection from creditors and also assets are never again subject to transfer taxes. Must be established in a state that has a Domestic Asset Protection Statute (e.g. Delawere, South Dakota, Alaska) and must have a corporate trustee registered in that state. Client cannot be the trustee.

Sale of Assets to Beneficiary “Defective” Trust– Established by a third party (e.g. parent, sibling) for client’s benefit. Client can be the trustee and the primary beneficiary. Client then sell assets to the trust without income tax consequences to the sale in return for a promissory note. Only value of outstanding principal subject to estate tax and creditors – all appreciation free of tax.

These are just a few strategies that with careful counseling can significantly further a client’s objectives. Because the tax law is set to change as of January 1, 2013, this opportunity may only be available for a very limited time.